Trump tariff impact: No need to be alarmed, this difficult phase will pass

Last week, relations between India and the United States (US) nosedived after President Donald Trump announced a 25 per cent punitive tariff on goods exported from India, effective August 27, in addition to the 25 per cent reciprocal tariffs that took effect on August 1. This difficult phase will pass as both countries have enough stakes in maintaining good relations.

 

Few believe Trump’s excuse that he is punishing India for buying crude oil from Russia. He is more hostile towards India after Pakistan nominated him for the Nobel Peace Prize, permitted trading in his cryptocurrency and allowed the US to explore oil in Pakistan, while India refused to give him credit for bringing about a ceasefire that ended the brief military engagement between India and Pakistan, following the Pahalgam terrorist attack. 

Trump said that he is halting the bilateral trade negotiations with India after Prime Minister Narendra Modi said that the interests of our farmers, fishermen, and milk producers would not be compromised. Later, India, Brazil, China, and Russia seemed to be drifting closer. Trump announced that he will meet with Russian President Vladimir Putin in Alaska on August 15 to discuss an end to the war in Ukraine. 

Amidst all these developments that can affect the direction of our trade, Indian exporters of shrimps, organic chemicals, textiles, carpets, knitted apparels, woven apparels, made-ups, diamonds, gem and jewellery, machinery and mechanical appliances, auto parts, and some other consumer goods who are staring at loss of business with the US due to higher tariffs, are looking for some help from the government to tide over the immediate crisis and diversify the export markets. 

The exporters of steel will be affected, but they have the financial strength to manage the setback. Trump has so far exempted tariffs on pharmaceuticals, electronics, and petroleum products. Meanwhile, the rupee depreciation has helped the exporters somewhat. The Reserve Bank of India (RBI) should not intervene to arrest the weakening of the rupee. Domestic inflation is also low, and we should be able to absorb any rise in landed costs of imports. Prudent fiscal and monetary policies can help boost domestic demand. The government is considering suitable relief for employment-intensive sectors and a package to help exporters that may be unveiled by this month. With proactive, timely and targeted interventions by the government, we will be able to cope with the difficult times. 

The US accounts for 18 per cent of our merchandise exports and 62 per cent of our services. 

Many US companies have investments in India, particularly in the manufacturing and information technology sectors. Recently, many have set up global capability centres to take advantage of our cheaper educated manpower. Many Indian companies rely on the US for technology transfer and software products. 

Many students still prefer to study in the US. Substantial inward remittances come from millions of Indian residents living in the US. 

There is enough goodwill for India among US legislators. They may persuade Trump to backtrack on the punitive tariffs before August 27. 

The tariffs will hit the US producers and consumers soon, provoking a backlash against Trump’s policies.  We need to bide our time till then and work the back channels to improve relations without giving in to unreasonable demands, and also take steps to improve the competitiveness of our domestic producers. There is no need to be alarmed. This phase will pass.

 

Email: tncrajagopalan@gmail.com